4 min read

A lack of Trusst

Cartoon showing the rush for bailouts.
Bailouts have become the norm, and not just for bankers. Source

1—A lack of Trusst

The British pound hit a record low against the US dollar yesterday "after Treasury chief Kwasi Kwarteng pledged a sweeping package of tax cuts, fuelling concerns about the government's economic policy as the United Kingdom teeters toward recession".

Essentially, the UK government is trying to grow its way out of trouble in the long-run by worsening its fiscal position in the short-run. According to Ryan Bourne, the playbook from which they're reading goes something like this:

  1. monetary policy should be responsible for dealing with inflation;
  2. tax policy should be set to ensure good incentives for work, investment, and economic output (rather than prioritise demand management or debt management); and
  3. regulatory policy should be set to avoid needlessly harming the supply of goods and services.

That plan also involves boosting immigration:

"In the coming weeks she [PM Truss] intends to raise the cap on seasonal agricultural workers and make changes to the shortage occupations list, which will allow key sectors to recruit more overseas staff.
Government sources have revealed that alongside the opening-up of visa routes for specific sectors, ministers are discussing allowing in more highly educated workers from across the globe. This includes proposals for a new visa for workers who graduated from one of the top 50 or top 100 global universities."

If the economy grows faster than government spending, then the debt to GDP ratio should come down over the long-run as total revenue increases, even with lower rates of taxation. But the falling pound suggests markets aren't convinced that the reforms will work as claimed, that growth in government spending will slow enough, or some combination of the two.

You can read Ryan Bourne's full summary of the plan here (~8 minute read) and the Times' coverage of the immigration push here (~4 minute read).

2—Bail-outs for everyone

"Today's governments have introduced some measures to cut consumption. But mainly they have turned on the fiscal taps. Alongside a tax-cutting budget outlined on September 23rd, Britain has allocated funding worth 6.5% of GDP in the next year to shield households and firms from higher energy bills, more than it spent on its furlough scheme and support for the self-employed in 2020-21. Germany and France are offering handouts and subsidies worth about 3% of GDP. European governments are nationalising huge chunks of their energy sectors. America has spent, too, if on a smaller scale. State governors are doling out 'gas cards' and suspending fuel taxes to help people refill."

That's from the Economist, which compares today's household bailouts to the winter of 1973-74, when "geopolitical strife" caused oil prices to triple. Back then Willy Brandt, chancellor of West Germany, provided very little support to households and simply asked people "to get dressed a little more warmly this winter". Britain's "benefits bill barely budged". But the modern politician is cut from a different cloth:

"Politicians have long sought to provide safety nets or stimulus in bad times. But over the past 15 years, they have become far more willing to shore up vast swathes of the economy. When industries, companies or people get into trouble, fiscal help is never far away. Gains are privatised, but a growing share of losses or even potential losses are socialised. To appreciate this role for the state, discard much of the conventional wisdom, which says that in the 'neoliberal' era governments have let free markets run riot. Instead, we have entered an era of 'bail-outs for everyone'."

Perhaps that's why the pound has been dumped: Truss' tax cuts are real and will happen soon, but slowing growth in government spending is a future commitment to which politicians over the past 15 years have not been able to abide.

You can view the Economist's full issue here (~7 minute read).

3—Carlsen speaks

Tweet from chess world champion Magnus Carlsen.
Three weeks of silence were finally broken. Niemann's move.

4—A trillion dollars later

China's 'Belt and Road' infrastructure programme was the brainchild of Xi Jinping, who in 2013 – just one year after assuming power – launched a mission to:

"Construct a unified large market and make full use of both international and domestic markets, through cultural exchange and integration, to enhance mutual understanding and trust of member nations, resulting in an innovative pattern of capital inflows, talent pools, and technology databases."

That stated goal was to be achieved via the lending of vast sums of cash to developing economies for the construction of productive transportation infrastructure. Alas, the execution has left a lot to be desired:

"A slowing global economy, combined with rising interest rates and higher inflation, have left countries struggling to repay their debts to China. Tens of billions of dollars of loans have gone sour, and numerous development projects have stalled. Western leaders have criticized China's lending practices, which some have labeled 'debt-trap diplomacy,' embarrassing Beijing. Many economists and investors have said the country's lending practices have contributed to debt crises in places like Sri Lanka and Zambia."

That's from a recent analysis by the WSJ, which cited the following stat:

"Nearly 60% of China's overseas loans are now held by countries considered to be in financial distress, compared with 5% in 2010, according to economists Sebastian Horn, Carmen Reinhart and Christoph Trebesch, who have written about international debt."

But as with policies such as 'dynamic zero-COVID', Xi Jinping is unlikely to admit any failings. That means "A full retreat on Belt and Road is unlikely", with China likely to continue "exploring other ways to make Belt and Road more sustainable".

You can read Lingling Wei's full WSJ article here (~8 minute read).

5—Further reading...

⚡ Soaring energy costs have led CERN officials to draw "up plans to limit or even shut down the recently rebooted Large Hadron Collider".

🧱 Construction of Donald Trump's southern border wall "is revving back up under Biden... The resumed operations will range from repairing gates and roads to filling gaps in the wall that were left following the pause on construction that Biden initiated in January 2021".

🗳️ Italy's hard-right centrodestra coalition won "a sweeping majority in Italy - their first since the Second World War".

🚀 NASA crashed a spacecraft into an asteroid in an attempt to change its course, a trial run for what is Earth's extinction prevention plan.